Pinecrest Signage (Photo credit: Wikipedia)
Nov. 23
Pinecrest Energy and Spartan Oil’s “merger of equals” took the market by surprise. The new Pinecrest Energy will be a $1-billion dollar oil weighted dividend paying company. With Rick McHardy on the board (STO CEO) and Wade Becker at the helm we are witnessing the rise of “CPG Junior”.
For those who are not very familiar with Crescent Point (CPG), they are a premier dividend paying light oil weighted company. They are a market darling and they use their premium valuation at will to raise money for accretive acquisitions. Crescent Point will be crossing the senior production threshold of 100,000 boepd this year.
How does the new company look like?
- 513.4 million shares basic (to be be consolidated on a 3:1 basis upon closing)
- Combined exit 2012 production is estimated at 9,600 boe/d (91% light oil)
- Exit 2013 production expected to be flat at 9,600 boe/d (91% light oil)
- One of the highest netbacks per barrel among its peers
- Based on $85 Edmonton Par and $3/mcf gas
- Basic payout ratio of 39% and total payout ratio of 104%
- Debt to cash flow multiple of 0.2x based on $35 million of debt
The Assets
Pinecrest has 250 net sections in in the greater red Earth area with about 435 drilling locations. Spartan Oil’s core area is in the Cardium where it holds 48 net sections with about 200 to 350 drilling locations.
Basically the combined entity has many years of drilling ahead of itself.
Spartan Oil comes with a large undeveloped land base in Saskatchewan, more than 49,000 net acres prospective for Bakken/Mississippian targets. However, the acreage is more exploratory in nature so I don’t think it will see much in terms of capital exposure.
When the merger news hit the wire, Pinecrest’s stock shot to $2.16 then drifted lower below $1.80 per share. What was the market thinking? On one hand it might have gotten to excited when the news came as flashbacks of CPG came to mind. On the other, the market quickly came back to its senses as it dawned on it the growth model is gone and the company has to prove the new model is working. Basically, the yield reflects the perceived risk.
The market works in mysterious ways!
In my opinion, this is one of the best income vehicles in the energy sector, as good if not better than Crescent Point itself! (That’s why I dubbed it CPG junior). But the market needs to get comfortable with the new PRY before it rewards the stock with a higher price.
For one their total payout ratio excluding DRIP is one of the lowest and will fall every year as their production declines moderate.
- 40% decline on exit 2012 production.
- 33% decline on 2014 production
- 27% decline on 2015 production
That means the capex required to maintain production will be falling year over year. Obviously, I expect the company to go into acquisition mode of more oil weighted assets funded by a healthy line of credit.
But let’s visualize what lower production declines mean.
Using the company’s guidance of 9,600 boepd (91% oil) let’s take a look at the cash flow sensitivity table assuming the company will keep the same production profile of 9,600 boepd:
| Maintenance Capex |
40% |
33% |
27% |
| $130M |
-$8M |
|
|
| $107M |
|
+$15M |
|
| $88M |
|
|
+$34M |
Cash flow Sensitivity table to the corporate production decline rate
That looks like a very healthy dividend (assuming no acquisitions or a collapse in the price of oil). Speaking of the price of oil, the company is budgeting $85 Canadian Par, let’s see what the total payout ratio looks like if the price goes lower or higher:
| Total Payout Ratio |
$75/bbl |
$80/bbl |
$85/bbl |
$90/bbl |
| 121% |
-$37M |
|
|
|
| 112% |
|
-$22M |
|
|
| 104% |
|
|
-$8M |
|
| 97% |
|
|
|
+$7M |
2013 CF sensitivity table to the price of oil (Canadian Par)
At $75 Canadian Par, the payout ratio is still lower than many domestic dividend paying companies. The deficit can be easily absorbed if the company believes this is a short term bump in the price of oil. At $90 Canadian, the total payout ratio drops below 100% spinning off more than $7M in free cash flow.
All of these numbers were generated using my oil and gas analysis software which also allows me to compare PRY to its peers. Right now, Pinecrest has the highest netbacks per barrel among oil weighted dividend paying domestic peers. At $1.79, it’s currently trading around 4.5x CFPS multiple with THE lowest D/CF ratio among its peers.
I like the new company, the assets and the management team. I am replacing New Zealand energy with the new Pinecrest for income.. In the near term, Pinecrest needs to get its 5,000 bopd hedges in for 2013 at a decent price. For the rest, Pinecrest enjoys an enviable balance sheet and in my opinion .
What do you think of the new Pinecrest?
